What are real estate debt securities and securitizations?
Real estate debt securities are marketable and liquid pools of mortgage loans that are packaged, or securitized, by banks and financial institutions that made the underlying loans to their customers. Banks often securitize loans to sell to private investors to free up their own capital so they can continue to make more loans to new customers. Debt securitizations are divided into multiple risk tranches, where one tranche may entail lower rate of interest from the investment but will in turn be less likely to suffer any consequences should an underlying mortgage borrower default on their loan payments. Conversely, a riskier tranche will entail a higher rate interest from the investment but will face a high likelihood of loss in the case of any underlying loan defaults for foreclosures of the underlying real estate collateral. The different risk tranches offered allow investors to choose the level of risk and return they want to target.
Common types of real estate debt securitizations are agency-backed, non-agency backed, collateralized loan obligations, and single-asset single-borrower securitizations (SASBs). Freddie Mac is an example of a large creator of agency-backed multifamily mortgage securitizations.